BERLIN (Reuters) ? European leaders vowed on Saturday to speed up plans to strengthen spending rules and get a permanent bailout fund up and running as soon as possible, a day after U.S. agency S&P cut its rating of several euro zone countries' creditworthiness.
The move by Standard & Poor's to downgrade nine out of 17 countries in the single currency area, including formerly top-rated France, drew criticism from some leaders who had expected action but on a smaller scale.
In Germany - whose top AAA rating survived unscathed - Chancellor Angela Merkel said the downgrades underlined why a so-called 'fiscal compact' must be signed by member states quickly, and the next bailout mechanism, known as the ESM, should be funded soon.
"We are now challenged to implement the fiscal compact even quicker ... and to do it resolutely, not to try to soften it," she said at a meeting of her conservative Christian Democrats (CDU) in the northern city of Kiel.
"We will also work particularly to implement the permanent stability mechanism, the ESM, so soon as possible -- this is important regarding investor trust," she added.
European Central Bank policymaker Joerg Asmussen warned that Europe's agreement to tighten fiscal rules was being softened, considering the latest draft of the agreement a "substantial watering down" of budgetary discipline because it would allow extra spending in extraordinary circumstances, the Financial Times Deutschland reported.
S&P said policymakers had not done enough to address Europe's debt crisis and were overlooking a key cause: sharp differences in economic competitiveness among countries that use the euro.
Leaders including Merkel have urged countries to tighten their belts with higher taxes and deep spending cuts to rein in massive budget deficits. But that has heightened market concern about their ability to grow their way back to health, pushing borrowing costs even higher for heavily indebted governments.
Austria, which was downgraded one notch from AAA, called the S&P's decision a wake-up call for the country to cut debt and deficits, and Europe to move more quickly.
"The downgrade is bad news for Austria but it should wake everyone up when such a thing happens," Finance Minister Maria Fekter said. "Now everyone recognizes that this ... is a matter of debt and deficits, not primarily of the economy."
The ratings decision hit some countries harder than others, with France, Austria, Malta, Slovakia and Slovenia suffering single-notch downgrades, but Italy, Portugal, Spain and Cyprus falling two notches. Portugal's debt is now rated junk.
European Central Bank policymaker Ewald Nowotny, an Austrian, said Italy in particular would now face problems given large refinancing needs this year in that country and its banks.
Asked in an interview broadcast by Austrian radio if Italy - now rated at the same BBB+ level as Kazakhstan - was "problem child number one," Nowotny agreed.
"In a certain sense, yes, because we know this year Italy has a very significant refinancing need. Italian banks also need refinancing," he said.
"In normal times this is all possible, in very nervous and difficult times it can be a problem and in my view this sharp downgrade of Italy is probably one of the most difficult and problematic aspects of this sweeping blow from the ratings agency."
Long-standing frustration with ratings agencies echoed across Europe after the S&P decision. While Germany and France downplayed the decision and called it expected, Spain's finance minister was more alarmed.
"The downgrade is far too broad, it effects too many countries, it effects the very credibility of the euro," Treasury Minister Cristobal Montoro said on the radio.
"It's important that the European institutions understand that it's time to do everything possible to build and reinforce the euro," said Montoro, whose highly indebted country has the highest unemployment level in the euro zone.
Meanwhile, in a move to circumvent their influence, Germany's Merkel backed a proposal to reduce the reliance of institutional investors on ratings agencies, which some of her allies say are politically driven.
The idea would be to introduce legislation to allow institutional investors to evaluate risk themselves and make decisions independent from the U.S.-based agencies.
"The (rules) are very, very strict, and lead to strong effects themselves. I think it is very useful to look at this and see where if necessary we can make changes to legislation," Merkel said at her party meeting.
European leaders are set to meet at a summit later this month to discuss how to boost growth and jobs, and Merkel's words on Saturday suggest she will also be looking for faster progress on tighter common fiscal rules.
But now, policymakers at the meeting may have bigger fish to fry. The downgrades threaten the top rating of Europe's current bailout fund -- the European Financial Stability Facility -- as contributors France and Austria are no longer rated AAA.
A downgrade of the EFSF could increase its borrowing costs, reducing its ability to protect the currency bloc's weaker members.
In an interview with Reuters, John Chambers, chairman of S&P's sovereign rating committee, said it would take further increased commitments from the remaining AAA-rated guarantors, including Germany, for the EFSF fund to retain its AAA status.
Merkel however rejected that idea on Saturday, saying Germany should not have to do more than other countries as a result of the downgrades.
"The necessary tasks that the EFSF must fulfill in the coming months, I very much believe, can be fulfilled with the current methods," she said. "The work of the EFSF will not be torpedoed. I see no need to change anything regarding the EFSF."
(Writing by Brian Rohan, additional reporting by Nigel Davies, Adrian Croft, Michael Shields, editing by Mike Peacock)